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Sell Low and Buy High: Arbitrage and Local Price Effects in Kenyan Markets

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  • Marshall Burke
  • Lauren Falcao Bergquist
  • Edward Miguel

Abstract

Large and regular seasonal price fluctuations in local grain markets appear to offer African farmers substantial inter-temporal arbitrage opportunities, but these opportunities remain largely unexploited: small-scale farmers are commonly observed to "sell low and buy high" rather than the reverse. In a field experiment in Kenya, we show that credit market imperfections limit farmers' abilities to move grain inter-temporally. Providing timely access to credit allows farmers to buy at lower prices and sell at higher prices, increasing farm revenues and generating a return on investment of 28%. To understand general equilibrium effects of these changes in behavior, we vary the density of loan offers across locations. We document significant effects of the credit intervention on seasonal price fluctuations in local grain markets, and show that these GE effects shape individual level profitability estimates. In contrast to existing experimental work, the results indicate a setting in which microcredit can improve firm profitability, and suggest that GE effects can substantially shape microcredit's effectiveness. In particular, failure to consider these GE effects could lead to underestimates of the social welfare benefits of microcredit interventions.

Suggested Citation

  • Marshall Burke & Lauren Falcao Bergquist & Edward Miguel, 2018. "Sell Low and Buy High: Arbitrage and Local Price Effects in Kenyan Markets," NBER Working Papers 24476, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24476
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    3. Gross, Jeremie & Guirkinger, Catherine & Platteau, Jean-Philippe, 2020. "Buy as you need: Nutrition and food storage imperfections," Journal of Development Economics, Elsevier, vol. 144(C).
    4. Daniel Agness & Travis Baseler & Sylvain Chassang & Pascaline Dupas & Erik Snowberg, 2022. "Valuing the Time of the Self-Employed," Working Papers 2022-2, Princeton University. Economics Department..
    5. Negede, Betelhem M. & Voors, Maarten & De Groote, Hugo & Minten, Bart, 2021. "Maize Price Seasonality in Ethiopia: Does Access to Improved Grain Storage Technology Matter for Farmers’ Welfare?," 2021 Conference, August 17-31, 2021, Virtual 315240, International Association of Agricultural Economists.
    6. Kumse, Kaittisak & Suzuki, Nobuhiro & Sato, Takeshi & Demont, Matty, 2021. "The spillover effect of direct competition between marketing cooperatives and private intermediaries: Evidence from the Thai rice value chain," Food Policy, Elsevier, vol. 101(C).
    7. Günther Fink & B. Kelsey Jack & Felix Masiye, 2020. "Seasonal Liquidity, Rural Labor Markets, and Agricultural Production," American Economic Review, American Economic Association, vol. 110(11), pages 3351-3392, November.
    8. Kate Ambler & Alan de Brauw & Susan Godlonton, 2018. "Rural Labor Market Responses to Large Lumpy Cash Transfers: Evidence from Malawi," Department of Economics Working Papers 2018-11, Department of Economics, Williams College.
    9. Cynthia Kinnan & Krislert Samphantharak & Robert Townsend & Diego Vera-Cossio, 2019. "Insurance and Propagation in Village Networks," PIER Discussion Papers 115, Puey Ungphakorn Institute for Economic Research.
    10. T Le Cotty & E Maître d’Hôtel & R Soubeyran & J Subervie, 2019. "Inventory Credit as a Commitment Device to Save Grain Until the Hunger Season," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 101(4), pages 1115-1139.
    11. Jacopo Bonan & Harounan Kazianga & Mariapia Mendola, 2019. "Agricultural Transformation and Farmers' Expectations: Experimental Evidence from Uganda," Development Working Papers 458, Centro Studi Luca d'Agliano, University of Milano.
    12. Brune, Lasse & Kerwin, Jason T., 2019. "Income timing and liquidity constraints: Evidence from a randomized field experiment," Journal of Development Economics, Elsevier, vol. 138(C), pages 294-308.
    13. Channa, Hira & Ricker-Gilbert, Jacob & Feleke, Shiferaw T. & Abdoulaye, Tahirou, 2018. "Estimating the impact of a credit and technology intervention on farmer maize transactions: Insights from a RCT in Tanzania," 2018 Annual Meeting, August 5-7, Washington, D.C. 274235, Agricultural and Applied Economics Association.
    14. Franklin Simtowe & Hugo Groote, 2021. "Seasonal participation in maize markets in Zambia: Do agricultural input subsidies and gender matter?," Food Security: The Science, Sociology and Economics of Food Production and Access to Food, Springer;The International Society for Plant Pathology, vol. 13(1), pages 141-155, February.
    15. Dietmar Fehr & Günther Fink & Kelsey Jack, 2019. "Poverty, Seasonal Scarcity and Exchange Asymmetries," NBER Working Papers 26357, National Bureau of Economic Research, Inc.
    16. Tristan Le Cotty & Elodie Maitre d'Hotel & Subervie Julie, 2019. "Inventory credit to enhance food security in Africa," CEE-M Working Papers hal-02018715, CEE-M, Universtiy of Montpellier, CNRS, INRA, Montpellier SupAgro.

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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